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WAITING
FOR THE NEXT SET
I was able to do some heavy thinking on a trip last weekend to Monterey to attend the US Marine Corps birthday ball with another couple (classmate of mine from Annapolis). I enjoy surfing and a quick road trip up the US1 from San Diego with my board--gets my mind going… (my first thought is LA traffic is terrifying). Many veterans of foreign wars were at the USMC ball and the comments were directed towards the commitment of our brave military in past wars in addition to the present. My good friend was one of the first Marines to arrive in Baghdad and his comments over the weekend reinforced the intense commitment many of the young men and women must have to survive under such harsh conditions. Today an Associated Press article reported American forces Friday pushed deeper into the last remaining insurgent stronghold in Fallujah, and the Iraqi government rushed reinforcements to Mosul, the country's third-largest city, where police lost control in the face of insurgent attacks. [2] If this war continues we need to consider the potential ramifications on not only our currency but also much of America’s youth. After paddling out in the frigid waters off Monterey I thought of how surfers seek improved results (catching waves and riding them) by using fundamental research to determine when and where a wave may surface and how it can be ridden (hopefully without drowning or being killed by a shark). The research today has been greatly improved (to the dismay of many locals in “secret spots”) by new technologies but there will always be undiscovered opportunities. Surf reports now show wave models and projected wind and wave size estimations and also give tide information. Mapping services provide historical data (good spots) and project areas, height, frequency and shape depending upon swell energy or direction. There is much to learn when seeking potentially improved results when looking to surf home breaks, much less determine what new uncharted areas will be like… Thus, theoretical projections of many areas and events are often underestimated or wrong. However, when paddling out (especially on a cold winter day with 12 plus foot waves) you quickly learn you have left the world of theory and have truly entered the no spin zone. I was clearly out of my element and the massive kelp beds and frigid water added to the intensity. Greed for a good left breaking wave was turning to fear as I witnessed some sets (consisting of a series of waves) come through which I wanted no part of… The smaller waves I enjoyed in Santa Barbara (which were still good size) were a thing of the past. Reality sets in on a larger day and fear is an emotion to consider. There may be other surfers in the water, but when you take off you are on your own. Nobody will see you (overhead size) from the lineup (outside the break) and you may be too far from the shore to be seen. The nice thing about the real world is if you are ready and prepared you may be in for an epic ride. I can’t guarantee results and nobody knows what 2005 will tell but I’m continuing to prepare. My movement to a new investment firm was carefully planned. Any lull between sets of waves will be used to gather strength and accumulate potentially sound investments from what we see to be the mother of all set waves eventually coming to our shores. You can see from the Bloomberg report their buoys are not projecting any waves to come. Maybe the swell is coming from a different direction. We’re looking at the real world where there may be no store of value (or success) in traditional methodologies. Jim Puplava’s comments in his last Storm Watch sum up my experience and analogy in the financial markets: “In the theoretical world of investing, there are two kinds of investments—those which entail a degree of risk and those which are considered to be risk free. In the real world, there is no such thing as a risk-free investment. Investments that are risk-free, such as treasury-bills, carry inflation risks.” [3] No amount of research may guarantee success in the upcoming years in the investment markets. I could see much volatility ahead as the storm gains momentum and the waves start to roll in… A good surfer will prepare physically and should consider his level of experience. One area we can control is our selection of asset classes and the timing of our moves. Continued due diligence (preparation) will only become more important as the storm gathers size and intensity. We can continue to look at the daily events in the currency, bond or equity markets but in the end nobody knows when a loss of confidence could erode our financial stability. My guess is a bond rout here may again aid the short-term perception of strength in paper so maybe we’ll get a bounce in the dollar. I did some heavy buying of gold shares this summer during our base building but we have yet to make a new high on the HUI. I’ve read much speculation about where we’re going from here after the election. In my opinion this storm has been long building beyond anything the executive office or financial planners can control. Mike Hartman’s charts on Wednesday show the currency markets (waves) are building from the storm. One thing I know for sure is the Federal Reserve is monetizing debt at increasing rates, thus telling us the opposite of the financial press. Our Fed Chairman said it best in 1966: The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which-through a complex series of steps-the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. [4]
I’ve read much discussion about the gold shares relative to the metal price and it will be interesting to see what comes short term and what will be the results in 2005. I agree with Mr. Sinclair that gold shares represent great values and on any retrenchment I will be accumulating. Along the same thought (and since I’m a natural gas bull) we know the American Stock Exchange Natural Gas Index has done well here and a recent spike may help us as we retest 280.
It will be interesting to see where many fund managers go when looking for growth in the next year. As we head into the winter my guess is a break above 280 may be very bullish for this index. In 1973 Benjamin Graham wrote “The Intelligent Investor.” While I have the utmost respect for Mr. Graham, one of his rarest misjudgments was the following sentence, “The near-complete failure of gold to protect against a loss in the purchasing power of the dollar must cast grave doubt on the ability of the ordinary investor to protect himself against inflation by putting his money in things." [5] Today were hearing about the launch of the new gold ETF and in the trust's proposal, 120 million shares are to be registered with a maximum aggregate offering price of $4.5 billion. Each share represents ownership in 1/10 ounce of gold. I’ll leave the comments to the experts like James Turk, Jim Sinclair or Stephan Spicer regarding the legitimacy of such a fund, but one can imagine today’s potential secular bull market in gold to greatly benefit from new trading vehicles adding to the demand for precious metals. Today’s Market All is well from today’s reports (then again maybe we’ve paddled out beyond the waves). U.S. stocks extended gains in the final hour of trading Friday amid better-than-expected economic data and a strong report from Dell Inc. The Dow Jones Industrial Average ended the day up 51 points, or 0.5 percent, to 10,521 while the Nasdaq Composite Index added 15 points, or 0.7 percent, to 2,076 and the S&P 500 rose 7.60 points, or 0.6 percent, to 1,181. Basically we’ve gone nowhere for the past 6-7 years on the DJIA and S&P when priced in US Dollars. Grain and soybean futures finished mostly higher Friday on the Chicago Board of Trade. Wheat for December delivery were unchanged at $3.02 3/4 a bushel, December corn rose 2 3/4 cents to $2.00 a bushel, December oats rose 3 cents to $1.46 3/4 a bushel while. January soybeans rose 5 1/4 cents to $5.25 a bushel. Beef futures finished mixed while pork futures moved higher in trading. Gold closed at $438.30, up $3.10 to a new 16 year high. Yasser Arafat was buried today among tens of thousands Palestinians in Ramallah. The following associated press releases were interesting so I’ll show the headlines for those willing to dig in further… U.S.
Weekly Oil and Gas Rig Count Is Down by Nine Homeowners
Brace for Higher Fuel Bills Southern California is reported to receive potentially 4-6 foot waves this Sunday. We shall see. Have a great weekend! Chris Sumner [1]
Burgess, Robert. U.S. Treasuries Fall After Fed Raises Benchmark
Interest Rate, Bloomberg, November 10, 2004.
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Many
distortions exist today and the pressures in financial markets and
geopolitical events seem to be more and more intense. The casual
reader might not notice the potential disturbance in the bond market
as Bloomberg reported low inflation. “The Commerce Department on
October 29th estimated that in the third quarter, the
inflation rate for consumer purchases excluding food and energy was
0.7 percent, the lowest since the fourth quarter of 1962.” [1] The
article went on to discuss how economists are less bearish on
treasuries due to projected growth cuts resulting from the price of
oil and consumer spending. This type of news could only be reported by
someone with either a Keynesian economic background or by someone not
noticing the potential rogue wave of inflation beginning to surface.
These types of reports are sad and it is what drove me to seek
knowledge from alternative sources (like FSO). We all know there will
be some poor and unfortunate souls who get caught inside when the
waves start crashing and I suppose it will be because most people are
still looking at the shore (past experience or historical models)
instead of out to sea where the waves are coming from…
